Jackson-based Consumers Energy sought at least double the increase approved by the Michigan Public Service Commission.

Regulators also opted to lower business rates, which means they will keep subsidizing residential rates but below current levels.

Prices historically have been skewed by regulators so residents pay less than the actual cost of electricity, while businesses pay more.

The subsidy will drop by $20 million, or 20 percent, under the order, which comes as business groups are lobbying the Legislature to force the commission to eliminate the subsidy over five years.

Advocates for the poor and elderly are fighting the effort, calling it a burden to people already struggling with higher gas and food prices.

"This rate alignment sends the message that Michigan is a good place to do business, where electric rates are just and equitable and economic development is valued," MPSC Chairman Orjiakor Isiogu said in a statement.

The three-member commission said it is committed to further realigning electric rates in Consumers Energy's next rate request. The panel also approved a new $6-a-month credit for low-income customers and a $3 credit for seniors now getting a senior discount.

Critics of House-passed legislation pending in the Senate said the commission's decision to shift rates shows lawmakers do not need to act on the bill. The legislation also would limit competition facing Consumers Energy and the state's other dominant electric utility, Detroit Edison.

"It certainly removes the only serious reason for business groups to support this proposal," said Dave Waymire, spokesman for the Customer Choice Coalition, a group of alternative power companies and their customers including schools and grocery stores.

But Doug Roberts Jr., director of environmental and energy policy for the Michigan Chamber of Commerce, said: "If we're going to have meaningful long-term savings, we've got to have this in statute so we know full-cost-of-service rates are going to happen."

He applauded regulators for taking a first step. The commission previously has been reluctant to lower business rates at the expense of residential rates. Numbers are still being crunched, but PSC staff said businesses could see a slight overall decrease under Tuesday's order.

The original rate skewing appears to have been prompted by the 1970s energy crisis that squeezed people's pocketbooks. Michigan's domestic automakers and other businesses were able to pay more than their share in the following decades. But the sour economy that has lingered in the state since 2000 has made subsidizing residential rates a bigger burden.

Also Tuesday, Customer Choice Coalition officials questioned how long the residential rate increase will be just 2 percent. They said rates will rise 5 percent in November, when customers no longer get a credit on their bill for part of the proceeds of Consumers Energy's sale of a nuclear plant, and another 5 percent in March when customers no longer get a credit for decommissioning another plant.

The PSC said the speculation has no merit. Others said it is not uncommon for credits and surcharges to be added and dropped from customers' bills. Detroit Edison, a subsidiary of DTE Energy Co., has a pending rate case before the commission.